Investment Clock dips into mild Stagflation but this could be temporary

Investment Clock dips into mild Stagflation but this could be temporary

Hiroki Hashimoto

6 August 2018

Our Investment Clock has dipped into mild Stagflation (the red dot in chart 1) as global growth continues to cool off from the peak and inflation rises from a low base. The deteriorating economic backdrop and continued trade tensions point towards volatile stock markets and, in our multi asset funds, we reduced our overweight position in stocks in June/July to the lowest level since 2012.

However, we expect this dip into Stagflation to be mild but probably temporary. China has shifted to easier fiscal and monetary policy, US activity is staying mostly strong and the negative activity surprises that we’ve been seeing in non-US data are bottoming out.

With no central banks in a major rush to tighten monetary policy, global nominal growth could pick up again over the next few months which would be supportive for stocks (chart 2). Further escalations in the US/China trade war remain a risk factor to our base case and we’re not rushing to add to our modest overweight position in stocks, but we would likely use dips in the stock market as an opportunity to add back.

Our Investment Clock has dipped into mild Stagflation (the red dot in chart 1) as global growth continues to cool off from the peak and inflation rises from a low base. The deteriorating economic backdrop and continued trade tensions point towards volatile stock markets and, in our multi asset funds, we reduced our overweight position in stocks in June/July to the lowest level since 2012.

However, we expect this dip into Stagflation to be mild but probably temporary. China has shifted to easier fiscal and monetary policy, US activity is staying mostly strong and the negative activity surprises that we’ve been seeing in non-US data are bottoming out.

With no central banks in a major rush to tighten monetary policy, global nominal growth could pick up again over the next few months which would be supportive for stocks (chart 2). Further escalations in the US/China trade war remain a risk factor to our base case and we’re not rushing to add to our modest overweight position in stocks, but we would likely use dips in the stock market as an opportunity to add back.

Chart 1: Investment Clock: Dips into mild stagflation but this could be temporary

Source: RLAM. For illustrative purposes only.

Chart 2: Stocks vs Bonds and Nominal Growth Scorecard

Past performance is no guide to the future. The value of investments and the income from them is not guaranteed and may go down as well as up and investors may not get back the amount originally invested. The views expressed are the author’s own and do not constitute investment advice.